ESG and Digital Transformation – challenges and opportunities (Part II)
An ethical investment portfolio must take a joint perspective on ESG and Digital Transformation integration for business decisions. Successful companies greatly benefit from carrying out ESG and DT change processes together. Those who carefully choose the right path and the best suited IT partner stay ahead and win.
This is part II from the blog series on the topic of ESG, created in Future Processing and AFKI collaboration. You can find part I and part III below:
The digital transformation market is fast expanding as digitalization technology offers new business models, fuels societal changes, and delivers tools for sustainable ESG. The COVID-19 pandemic has only intensified major changes, requiring many business owners to adapt fast to the new reality. International Data Corporation (IDC) predicts digital transformation spending will reach $1.97 trillion in 2022 and a staggering $6.8 trillion globally by 2023. Furthermore, 30% of top 2000 global (G2000) companies will allocate a capital budget equal to at least 10% of revenue to fuel their digital strategies, IDC says.
The reality of most DT projects’ ROI
As many IT experts encourage businesses to deep dive into digital transformation initiatives, the inconvenient truth is that 70% of DT projects fail to return the investment. It can happen due to different reasons, connected with the lack of alignment, insufficient in-house talent or specific metrics, but also inadequate tech infrastructure, and a shortage of qualified IT partners or cultural deficit.
BCG has completed a study of 825 executives who implemented digital transformation in their companies covering all industry sectors and types of digital transformation.
The success score is calculated based on the percentage of predetermined targets met and value created, the percentage of targets met and value created on time, the success relative to other transformations, and the success relative to management’s aspirations for sustainable change.
8 factors causing DT failure
More detailed failure analysis of DT projects identified both key internal factors and their contribution to unsatisfactory transformation results. Here are the main reasons why digital transformation doesn’t work out Every business owner should be aware of them before they start to work out the DT strategy.
To start, it is essential to learn from other companies experience and check internal factors and involve IT partners and consultants:
- Getting the right information to the right person in charge of implementing a particular phase of a project (75%)
- Reliance on paper scanning as the most important form of capturing information (72%)
- Migrating data from legacy systems into more modern technology (59%)
- Lack of robust, enterprise-information governance policies (75%)
- Insufficient training for employees (32%)
- IT bottlenecks (33%)
- Lack of executive buy-in (38%)
- Insufficient in-house talent (38%)
As a result, in addition to hiring IT experts, it is critical to review internal tech infrastructure, the board’s and workers’ attitudes toward changes, and in-house IT professionals who may either accelerate or stifle growth.
Digital Transformation and ESG ratings
The awareness of risks is one thing, but we need to remember how important ratings and rankings are in both: planning and reviewing investments. ESG and digital transformation both have metrics and methods for assessing their maturity.
There are 6 dimensions in which we can assess the maturity of a DT project:
The smallest number of enterprises in the study, the Differentiators, report strong revenue growth and tend toward pure-play or heavily online-focused retailers, who are consistently more skilled than average at all the marketing and eBusiness functions we have considered in this study, including project management, customer insights, and direct marketing. These digital transformation experts are seamlessly blending the digital and physical worlds.
The most important characteristic of Collaborators is not industry or business size, but the fact that companies in this category are substantially more likely to interact internally and externally to allow practice and innovation with digital. 95 percent of Collaborators prioritize their brand’s entire customer experience over the success of any one channel. More Collaborators claim great coordination and continuing contact between marketing and IT than any other area. In comparison, the fewest Collaborators said their IT staff handle marketing initiatives as transactional, one-time requests.”
ESG investments risks are incomplete without adding DT risks
ESG ratings impact corporate financials more than many would expect. How is it possible? As much as one-third of investments in 2025 will be based on ESG ratings and scores. However, $3.7 trillion of global digital transformation investments in 2026 will be missed in ESG reports and rates.
Most large companies are already reporting on ESG metrics; however, few add digital transformation metrics are added to corporate financial or ESG reports.
While financial managers are laser-focused on corporate sustainability tracked by ESG ratings, they mostly fail to consider the DT as the major predictor of corporate resilience and longevity.
Investment risk planning: ESG & Digital Transformation included
March 2020 has shown every business in the world that not everything can be planned, and much less can be predicted. Even though at the start people thought the limitations and challenges connected with the COVID-19 pandemic would soon be over, we will be facing an unknown “new normal” in which DT will likely play a major role.
We have no influence over unforeseen global destabilization, societal trends, or shifting necessities of the moment. The be found in the McKinsey report. The study contains further information on recent behavioural shifts that will impact company decisions.
It is widely accepted that executives and boards of directors must lead businesses on a narrow path between creating economic value and mitigating risk. To perform these difficult tasks and make better investment choices, companies need to carefully analyse both: current and future DT and ESG transformations. To plan for risks accordingly, the whole analysis should be carried out a few years ahead. We also need to remember that actionable ESG and digital transformation plans for major risks and sustainability are demanded by investors, stakeholders, corporate executives and boards of directors.
Choosing a qualified IT partner to succeed
The essential decision to make before we start planning DT and ESG changes is choosing the experienced and well-qualified IT partner of both processes. In addition, joining peers in forward-thinking industry consortiums provides additional value to risk mitigation planning. The expert team to cooperate with the company will evaluate risks, and work out the strategy for both transformations. Best-suited IT partners will support sustainable changes from the stage of consulting and collecting requirements to adapting the existing systems or building brand new ones.
As a result, the implemented solutions will be more likely to succeed but will also contribute to the overall improvement of business and related success of investments.
Manuel Vexler is the Executive Director of AKFI, the Actionable Knowledge Foundational Institute, a non-profit global industry consortium. It serves as a platform for forward-thinking companies embarking on Digital Transformation and ESG initiatives. Members’ working groups integrate Digital Transformation and ESG expertise and together develop actionable plans. When implemented, the strategies safeguard stakeholders against catastrophic risks, resulting in substantial economic benefits for stakeholders.
For further information, go to www.akfi.org.